Whether a start-up or a longstanding company, hiring workers is an essential part of owning a business. The classification of your worker as an Employee or Independent Contractor has important implications, so it is critical to understand the difference.

Generally, a worker is as an Employee when the employer has the right to control the details of how the services will be performed. Essentially, the employer is in complete control of when, how, where and how the work is done. An Independent Contractor is one who is employed to do certain work, who employs his own labor and does the work according to his own ideas and plans, to whom the owner looks only for results of the work. The employer gives deference to an Independent Contractor on details as the focus is completion of the work.

The IRS has a 20-factor test to determine whether a worker is an Employee or Independent Contractor. The following chart summarizes how each of the 20 factors support the classification of Employee or Independent Contractor:

Under President Trump, the Department of Labor (DOL) issued a new rule on worker classification, which was withdrawn by the Biden administration. The rule would have given employers 2 primary factors in classifying workers: (1) the nature and degree of control over the work; and (2) the worker’s opportunity to earn profits or incur losses. Analysts and pundits believe the DOL’s rule was more employer friendly as it deemed two factors to be most important. The Biden administration’s revocation of the rule returns employers to the “economic realities test” which somewhat models the IRS 20-factor test.

Virginia Specific Rules

Effective January 1, 2021, Virginia applies the 20-factor IRS test in determining the classification of a worker as Employee or Independent Contractor under Labor and Employment Laws (including the Virginia Minimum Wage Act), the Unemployment Compensation Act, the Workers’ Compensation Act, and State tax laws. Workers are presumed to be Employees unless it is demonstrated that they are Independent Contractors. As mentioned, it is imperative that as a business owner you correctly classify your worker. Virginia employers that fail to properly classify the workers, and thus fail to pay the correct taxes, face a $1,000 civil penalty for the first offense, a $2,500 penalty for a second offense, and a $5,000 penalty for a third or subsequent offense.

North Carolina Specific Rules

There is no statutory definition for an Independent Contractor under North Carolina law. However, North Carolina courts have applied a “right-to-control” test for the last 60 years. Under this test, a worker is an Independent Contractor if he or she:

• Selects his own time;
• Is free to use such assistants as he or she thinks proper;
• Has full control over those assistants;
• Is engaged in an independent business, calling, or occupation;
• Has the independent use of his or her skill, knowledge, or training in executing the work;
• Is doing specific work at a fixed price;
• Is not subject to discharge or termination because he or she adopts a particular method of work; and
• Is not in the regular employ of the “employer” or contracting party.